James Montier sees “deep value” in markets – he is bullish

James Montier, a market guru usually known as a permabear has turned bullish of late. In keeping with my bullish sentiments, I have posted his thoughts below according to Bloomberg News.

That said, I should always qualify my ‘bullishness.’ I still believe we are in a bear market and that equities will go lower on an inflation-adjusted basis. Investing only in index funds is a bull market strategy to be avoided like the plague. However, there are many stocks trading for 3 and 4 times earnings like Valero Energy or Chevron that deserve a look – Montier obviously agrees. This is shaping up to be a value investor’s dream.

Notice the huge number of deep value stocks in the energy sector at the bottom of this post.

Societe Generale SA strategist James Montier said he’s never been so bullish after the financial crisis dragged down prices for stocks, corporate bonds and inflation-protected government debt.

The Standard & Poor’s 500 Index is “distinctly cheap” because it trades for 15.4 times the 10-year moving average of its companies’ profits, compared with an average of 18 for the U.S. market since 1881, London-based Montier wrote in a research note today. Fifteen stocks in the U.S. index, from Chevron Corp. to Gap Inc., pass his test for “deep value,” while a tenth of shares in Europe and a fifth in Asia qualify.

“This is a value investor’s version of heaven,” wrote Montier, SocGen’s global equity strategist. “From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy.”

Corporate bonds are pricing in the highest default rate since the Great Depression and some senior secured debt is trading for as little as 50 percent what investors would recover in a bankruptcy, Montier wrote. The drop in bonds may amount to “the investment opportunity of a lifetime,” he said.

Market Plunges

Equities tumbled this year, sending benchmark indexes in the U.S., Europe and Asia down more than 40 percent, as financial-company losses stemming from the U.S. housing-market collapse approached $1 trillion. Merrill Lynch & Co.’s U.S. Corporate Master Total Return Index of investment-grade corporate bonds declined 13 percent this year.

The Federal Reserve has reduced its benchmark interest rate to 1 percent from 5.25 percent in September 2007 and pledged to lend more than $7 trillion to revive the economy. Investors can get cheap insurance against the risk Fed lending spurs inflation by purchasing government bonds that pay interest on a principal amount that rises with the consumer price index, Montier wrote.

“Such instruments have seen their yields rise dramatically of late,” he said. “Mr. Market is offering you the opportunity to protect yourself from the ravages of inflation in an exceptionally cheap way.” Bond yields move inversely to prices.

Montier was a member of the top-ranked investment strategy team in Thomson Extel’s surveys the past three years.

“With all of these opportunities available I have never been more bullish!” he wrote. “Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.”

S&P 500 stocks that Montier characterizes as “deep value opportunities” based on profit and dividend yields, debt levels and price relative to earnings:

I think I should qualify the above. I know James well – alongside Albert Edwards his chief partner in bearish crime – and its important to say that although James says there are valuation anomalies he’s very alive to Albert Edwards broader macro fears and doesn’t discount technical factors that suggests continued selling. a good example of this is in Japan in which James finds a huge number of bargain stocks but look what’s happened there. Disconnecting a bottom up value focus from a top down macro analysis is a mugs game and risks the perils of jumping in early as he suggests. So is stuff cheap – yes. Does it matter now – possibly not all things considered. The other big insight missing is that he still rates Euroland a more interesting place alongside Japan for bargain hunters and that until very, very recently the US hasn’t featured prominently on value radars. That chimes with albert’s analysis that the US is still possibly quite over-valued.

aerial view December 8, 2008 at 8:10 pm

The problem with averages even moving averages is they are more of a lagging rather than leading indicator. They seem to do a relatively decent job when investments are held over longer time periods, say 10-20 years, yet like the market itself, can stay irrational until the investor goes broke. Currently, the worldwide financial system is undergoing a change that is significantly different than ever before: over 90%of consumers have little or no savings, access to credit and have to face significantly rising costs in utilities, gasoline, education, healthcare and the latest temptations in technology (digital tvs, etc). This time, they are spent out and NOT going to recover to previous purchasing power levels. Couple this with the gains in productivity and development of emerging economies and we are headed for a multiyear to decade long PERPETUAL DEFLATIONARY ECONOMY resulting in stagnating smooth averaged PE ratios of 10 and earnings of $50/share. Multiply this out and you end up with an S&P of 500 or a DOW of 4930! No, it won’t happen immediately, but this is where we are heading and once we get there, we most likely will stay in this range +/- 25% for years. Call me crazy now, but don’t call me 2 years from now when you’re broke! Good Luck!